Unit 7: Labor Markets

Much of what is discussed in economics is seen from the viewpoint of a business owner. It is sometimes easy to overlook the contributions of labor. This section is devoted to looking at the contributions of labor in the field of economics. I will try to explain this section using positive economic statements, rather than normative ones.

The Demand for Labor

Acquiring skills can be costly. In the United States, workers usually pay the cost of acquiring skills before they receive a benefit in the form of a higher wage. As was discussed in unit 4, human capital is the accumulated skill and knowledge of human beings. Remember from unit one, there is an opportunity cost in acquiring skills, which includes such things as tuition and reduced earnings. Businesses are willing to pay a higher wage rate to a higher-skilled worker than to low-skilled worker. Wage rates workers receive can also be influenced by changes in the supply of labor. An increase in the supply of labor, such as an increase in the number of adults, can have the affect of pushing down wages. With respect to a firm’s demand for labor, both price and non-price issues come into play. The law of demand affects a firm’s demand for labor quite simply: if the wage rate increases the quantity of labor demanded decreases, and vise versa. With respect to issues other than wages, a firm’s demand for labor will decrease if the firm’s output price decreases.

Labor Unions

Labor unions were born out of social change of the industrial revolution. Labor unions are associations of workers which seek to promote their members interests. Unions came into existence because workers felt that the owners of business were not representing their interests. Labor unions have had a long struggle in our nation’s history to acquire a change in their position. This struggle has cost many their lives. Our nation has declared a national holiday (Labor Day) to honor the labor struggle and workers.

A Very Short History of Labor in the United States

Why would workers want to organize themselves into a union? As has been demonstrated in previous units, capitalism stresses the profit motive. One way to increase profits is to reduce wages, benefits, and any costly improvements to worker safety. This creates tension between management who want to increase profits for either their benefit or the benefit of stockholders, and workers, whose goals are to earn a living wage and a safe work environment.

The man who is the first person who needs to be discussed in United States labor history is Samuel Gompers. Samuel Gompers led the AFL (American Federation of Labor) from 1886 to 1924. He began organizing skilled unions. Later in the labor movement, unskilled labor also began to organize. By the turn of the twentieth century, the membership of the AFL was 1.7 million. By the beginning of World War I, it climbed to 2 million. Gompers held conservative political views and believed that trade unionists should accept the economic system. He was also resistant to include women, minorities, especially blacks, and non-skilled workers in the AFL. As a result, a rival, more radical organization, the Industrial Workers of the World (IWW) was formed. However, their numbers remained small compared to American Federation of Labor. Regardless of the union, it was recognized in the early part of the twentieth century that individual workers could not secure bargaining power on their own against huge corporations. But thousands of workers banding together did have a certain amount of leverage- they could withhold their labor. That is why early activists used the slogan: “individually we beg, collectively we bargain”. Unions exist because workers realize that acting together provides them with more bargaining power than would acting individually and being at the mercy of their employers. Corporations used a number of methods to defeat the labor movement, from blacklisting union members, to court orders prohibiting strikes, to the use of violence to resist labor’s demands. The struggle even went to the court of public opinion. Many Americans saw unions as subversive, un-American, and in some cases, evil.

The early labor struggle focused on safer working conditions, a reduced work week, and wages. It was not easy starting a union or participating in a union strike. The owners of corporations had a great deal of power and a number of strategies to suppress union activities. One strategy used by employers was to bring in recent immigrants, desperate for work, to break strikes. When employers brought in Italians to break a strike in the coal mining area around Pittsburg in 1874, 3 of the Italian replacement workers were killed. The wealthy class benefits from economic competition between various ethnic groups. In Rock Springs, Wyoming, in the summer of 1885, whites attacked five hundred Chinese miners, killing twenty-eight of them.

“I can hire one-half of the working-class to kill the other half.”–Jay Gould, Gilded Age rail tycoon and real estate speculator

Employers of large corporations, had enormous amounts of money to influence labor disputes. One strategy was to spend money in local and national elections to gain support from local officials who could call out state or national troops. An example of this is the railroad strike of 1877 where one hundred people were killed. Another strategy was for an employer to hire its own private army. An example of this is the Homestead Strike of the Carnegie Steel Plant in 1892. The Pinkerton detective agency was hired to protect strikebreakers and to break the union. On the night of July 5th, 1892, hundreds of Pinkerton guards boarded ships and made their way down the river to the plant. Gunfire broke out. Three Pinkertons and seven strikers were killed.

In 1886 there was a movement for an eight-hour work day. On May 3, there was a demonstration in Chicago where police fired in a crowd of strikers, killing four. The next day there was a demonstration at Haymarket Square in Chicago. Approximately 3000 people gathered. 180 policemen showed up and ordered the crowd to disperse. A bomb exploded, killing seven officers. Police began to fire into the crowd, killing several people and wounding over two hundred.

Many workers went on strike because of dangerous work conditions. There were many occupations where workers would die on the job. On average, from 1905 through 1930, well over 2,000 U.S. miners would die every year. In the 1890’s , it is estimated that two thousand railroad workers were killed on the job each year. The Pullman strike of 1884 in Chicago saw 3000 workers go on strike. Four thousand strikebreakers were brought in. Violence broke out. There were many casualties. 12,000 federal troops were deployed (approximately half the U.S. army), on pretenses to keep the peace, but surely to break the strike. It is estimated that thirty-four people were killed. The Triangle Shirtwaist Company on March 25, 1911, burned to the ground. Because it was standard practice to lock the doors so that workers couldn’t leave, 146 workers, mostly women, were burned to death. In 1904, it is estimated that 27,000 workers were killed on the job in manufacturing, transportation, and agriculture. According to a report of the Commission on Industrial Relations, in 1914, 35,000 workers were killed in industrial accidents and 700,000 injured. In 1912, in Lawrence Massachusetts, there was a strike against the American Woolen Company. Ten thousand workers went on strike. The strike occurred during the winter. Because of the cold and the lack of food, strikers sent their children to other families until the strike was over. City officials in Lawrence, declared this violated a statute on child neglect and would not allow any more children to leave. When a group of children tried to leave from the train station, police moved in and beat with clubs parents and children. In 1914 there was a strike by coal workers in Colorado. When the strike began, the miners were evicted and forced to live in “tent cities”. On April 20, 1914, National Guards soldiers began shooting on the tent city. Twenty people were killed, including 11 children.

In 1938 John Lewis and the United Mine Workers, who were trying to unionize unskilled workers, broke away from the AFL and formed the CIO (Congress of Industrial Organizations). They rejoined in 1955 to form the AFL-CIO.

The Great Depression created an environment for the growth of labor unions. In 1935 the National Labor Relations Act was passed. This act is sometimes referred to as the Wagner Act, from its author. The Wagner Act allowed workers to join unions and engage in collective bargaining. Employers were forbidden from interfering with workers organizing and from penalizing employees who engaged in union activities. This act put the force of the government on the side of unions for the first time. One of the rights won by workers was collective bargaining. This is the process of negotiations between the union and management over wages and working conditions. During the negotiation process, unions and management have a set of strategies that can be used to ensure that companies bargain in good faith. Unions may threaten a strike, which is a group decision not to work. Management might threaten a lockout, which is where the firm refuses to operate. Management might also threaten to hire replacement workers to get an agreement in its favor. In the collective bargaining process if the two sides can not come to an agreement, often the process moves into binding arbitration. Binding arbitration is a process where a third party, an arbitrator, determines issues such as wages and working conditions.

After World War II the Republicans captured control of Congress. In 1947 Congress passed the Taft-Hartley Act. This piece of legislation was more favorable to business. The Taft-Hartley Act had three main provisions. The first gave the government the right to halt a strike by a court order if the strike would jeopardize “national health and safety”. It allows the president to declare an 80 day cooling off period. If an agreement can not be reached during that time frame, then the strike may resume. The second provision was that it allowed states to enact “right to work” laws, which gives states the right to restrict union shop contracts. These right to work laws prohibit a contract that requires union membership as a condition of employment. 25 states, mostly in the South, have right to work laws. Lastly it provided that the union or the employer must, before terminating a collective-bargaining agreement, serve notice on the other party and on a government mediation service.

Union membership has changed in the United States.Currently, only 1 in 9 workers is unionized. Many traditional jobs that had heavy union membership (factory workers, steel workers) have declined over the years as production has moved elsewhere. Yet, union membership in professional organizations ( teachers, government workers) has increased. Nearly 40% of public-sector workers are union members. The largest labor union today is the National Education Association with over two million members. The future of unions may lie in the public sector, such as state and municipal workers. Increased deregulation since the 1980’s in industries such as airlines and trucking has forced firms to compete more intensely and to hire less expensive nonunion labor. In addition, the downsizing trend has closed plants and eliminated jobs, making it harder to organize a union or to win concessions.

Lawrence Mishel at the Economic Policy Institute has produced a study documenting the union impact on wages and benefits in The State of Working America. For all workers in the United States, the union wage premium in 2011 was 13.6%. That is, on average, union members earn this much more than their nonunion counterparts. The comparison is made especially significant since it holds the following wage-determining factors constant: experience, education, region, industry, occupation, race/ethnicity, and marital status. This means that if we compare those with the same education, race, occupation, etc., union workers still make more money. We get similar results if we look at benefits. Union employees are more likely to have employer-financed health insurance (28.2%), pensions (53.9%), and time off (14.3%). Union benefits are also better. For example, union workers have lower deductibles and co-payments in their healthcare plans and are much more likely to be covered when they retire. They are more likely to have defined benefits pensions.2

Some argue there are economic costs to unions ( loss of productivity, retention of poor workers). The Employment Policy Foundation (EPF) stated that a unionized company’s output per employee would be 2.4 percent less than a union-free competitor, if that unionized company experienced just a .25 percent reduction in productivity. Their conclusion was that unless the unionized company could sell their product at a higher price or other cost savings could be attained, the unionized company is likely to see 14 percent less in profits per labor hour than their non-union competitor.3

Whatever your feelings are towards unions, they have bought benefits to all workers, union and non-union alike. How can this be true? Because today non-union companies offer many of the same benefits as union companies, even though they don’t have to. Nonunion firms do this because they are competing for labor. They don’t wish to lose productive employees to a union firm, so they try to offer the same benefits as union firms.

How does union membership in the United States compare with union membership in other leading economies? The graph below shows that the United States has one of the least unionized workforces in the world.

Since the labor movement began, unions have tried to win benefits for their workers. Over the years, their struggle has produced the following benefits: 1) shorter work week, 2) time and a half for overtime pay, ) 3) safer workplaces, 4) health insurance, 5) retirement benefits, 6) paid vacations, and 7) a minimum wage. What the preceding list provides are benefits won by unions in the past.

Unions have goals for their workers. One goal is to decrease the supply of labor. This is done through certifications, apprenticeships, reduced immigration, and professional organizations. This has the affect of raising the wage rate, but decreasing the number of jobs available. Because of this, unions also try to increase the demand for union labor. They try to increase the demand for labor, through things like the “Look for the Union Label” campaign. It is hoped that this would increase demand for union made products. They may also encourage restrictions on imports, push for minimum wage laws, and support immigration restrictions. A third goal is to increase wages, usually done through collective bargaining. What has been described in this paragraph are goals that unions seek to maintain in the present.

In 1938 Congress passed the Fair Labor Standards Act which called for the establishment of a 25 cent an hour minimum wage. Since then the minimum wage has been raised, but not enough to keep pace with inflation. Some states have enacted minimum wages of their own that exceed the federal minimum. There are some economists who believe that minimum wage laws hurt the very people they are intended to help. These economists believe that minimum wage laws create a surplus of workers, especially amongst teenagers and the poor- those who need the help the most. The argument here is that if there is no government involvement there will exist a market equilibrium wage rate. For example, if no minimum wage exists, the market might pay low skilled workers $4 per hour. At that rate there would be 6 million workers. If however, a minimum wage is enacted at $6 per hour, there will only be 5 million workers. So there exists a trade-off between an increase in wages and an increase in unemployment.

On the other side, our economists who believe the minimum wage law was put into effect to abolish sweatshop wage levels. If the current minimum wage is $7.25 an hour, is there anyone whose work is worth less than that? Can anyone in the United States live on our minimum wage? Is lowering the minimum wage just another excuse to pay workers less? Another argument that a raise in the minimum wage is good for workers is that it increases labor productivity. By raising the incomes of workers, a minimum wage may inspire them to become more productive. In 1914 when Henry Ford raised the wages of his employees from $2.50 per day to $5 per day, there was a sharp decline in workers quitting their jobs and absenteeism. This resulted in productivity gains that outpaced the increase in wages. Economists also raise the concept of price elasticity. Think about gasoline and how it is an inelastic good. The price has gone up over the past few years considerably, but people still have to fill up their cars to get to work. Many economists think that minimum wage types of jobs are also price inelastic.

So where does this leave us? There is some evidence that increases in the minimum wage do cause people to lose jobs, especially among the unskilled. But the last minimum wage increase in 1996 saw employment actually go up slightly. Some economists say that because unemployment did not rise that the long held economic belief that unemployment always goes up when there is a raise in the minimum wage is no longer true. Other economists say that the reason the unemployment rate didn’t go up was due to differences in regional economic growth, not to changes in the minimum wage. So what would the father of economics have to say? In his book “The Wealth of Nations” he said, ” A man must always live by his work, and his wages must at least be sufficient to maintain him. They must, even upon most occasions, be somewhat more; otherwise it would be impossible for him to bring up a family, and the race of workers would not last beyond the generation.”2

The chart below shows the unemployment rate for the year when the minimum wage was raised and the unemployment rate for the following year. Is there a correlation between the two as most economists believe?

Along with safety, wages is one of the most important components in a worker’s life. How have worker’s wages fared with new changes in the American economy and to the economic decline of the past decade? The research indicates not well. According to a recent report by the Economic Policy Institute, the failure of the economy to provide a living wage to a majority of its workers has created a decade of stagnation. The main problem is that workers have not seen wage increases to match their productivity increases. While wages are stagnant or declining for most workers, corporate profits are at all time highs.

The Economic Policy Institute’s paper’s key findings include:

According to every major data source, the vast majority of U.S. workers—including white-collar and blue-collar workers and those with and without a college degree—have endured more than a decade of wage stagnation. Wage growth has significantly underperformed productivity growth regardless of occupation, gender, race/ethnicity, or education level.

During the Great Recession and its aftermath (i.e., between 2007 and 2012), wages fell for the entire bottom 70 percent of the wage distribution, despite productivity growth of 7.7 percent.

Weak wage growth predates the Great Recession. Between 2000 and 2007, the median worker saw wage growth of just 2.6 percent, despite productivity growth of 16.0 percent, while the 20th percentile worker saw wage growth of just 1.0 percent and the 80th percentile worker saw wage growth of just 4.6 percent.

The weak wage growth over 2000–2007, combined with the wage losses for most workers from 2007 to 2012, mean that between 2000 and 2012, wages were flat or declined for the entire bottom 60 percent of the wage distribution (despite productivity growing by nearly 25 percent over this period).

Wage growth in the very early part of the 2000–2012 period, between 2000 and 2002, was still being bolstered by momentum from the strong wage growth of the late 1990s. Between 2002 and 2012, wages were stagnant or declined for the entire bottom 70 percent of the wage distribution. In other words, the vast majority of wage earners have already experienced a lost decade, one where real wages were either flat or in decline.

This lost decade for wages comes on the heels of decades of inadequate wage growth. For virtually the entire period since 1979 (with the one exception being the strong wage growth of the late 1990s), wage growth for most workers has been weak. The median worker saw an increase of just 5.0 percent between 1979 and 2012, despite productivity growth of 74.5 percent—while the 20th percentile worker saw wage erosionof 0.4 percent and the 80th percentile worker saw wage growth of just 17.5 percent.

According to a 2014 report by the Social Security Administration, in 2013 50 percent of all American workers made less than $28,031, and 39 percent of all American workers made less than $20,000. If you worked a full-time job at $10 an hour all year long with two weeks off, you would make $20,000. Median pay in 2013 was just $28,031.02. That means that 50 percent of American workers made less than that number, and 50 percent of American workers made more than that number. Average pay for 2013 was $43,041 — down $79 from the previous year when measured in 2013 dollars. Worse, average pay fell $508 below the 2007 level. Flat or declining average pay is a major reason so many Americans feel that the Great Recession never ended for them. A severe job shortage compounds that misery not just for workers but also for businesses trying to profit from selling goods and services. Our politicians have stood by as millions upon millions of good paying jobs have been shipped out of the country. Millions of other middle class jobs have been lost to technology. This has resulted in intense competition for the middle class jobs that remain, which has had the affect of driving down wages.

According to a new study by the Russell Sage Foundation, the inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36% decline.

Our country experienced double digit unemployment rates during the Great Depression. Since then, our government has made it a priority to focus on how to keep the unemployment rate down. That means to promote long term economic growth, we first have to fix any short term unemployment problems. To achieve economic growth, governments focus on a number of economic indicators including unemployment. The unemployment situation focuses on the number of workers in the labor force. Unemployment results in hardships for individuals and families. Besides imposing a cost on individuals, unemployment also is a burden for an economy. Fewer goods and services are produced. When the economy does not provide enough jobs to individuals who are seeking work, the productivity of that unemployed labor is lost. Finally, during periods of unemployment, governments increase social spending, such as unemployment compensation.

The Labor Force

The United States labor force consists of anyone who is 16 years or older, not in an institution, and is working. The Civilian labor force is the labor force minus the military. In economic terms, unemployment then refers to idle labor.

To be counted in the unemployment rate, a person must be at least 16 years of age and without work, but actively looking for a job. The unemployment rate then, is the ratio of the number of unemployed persons to the number of persons in the labor force. For example, if there are 128 million people in the labor force, and their are 8.7 million people unemployed, then the unemployment rate would be 6.8 percent.

There are four main types of unemployment. Of the four, structural and cyclical are of the most concern to economists and government officials.

Frictional Unemployment. Temporary unemployment due to imperfections in the labor market. It occurs when people are in between jobs or just entering or reentering the labor force. Frictional unemployment is brief. It takes time to post a position, go through the interview process, and then to finally get a person to the business to work. At any given time, 2 – 3 percent of the labor force is frictionally unemployed. Examples of frictional unemployed workers include those who get fired, quit, or are looking for new jobs, students, homemakers reentering the labor force, and servicemen and women who have recently been discharged from the armed services.

Structural Unemployment. Long term unemployment due to changes in the structure of the economy. Demand for some kinds of goods gives way to demand for other types of goods. For example, telegraph operators have lost their jobs to technology. Other reasons that contribute to structural unemployment include: 1) workers lacking required skills, 2) unable to move out of depressed areas, 3) displaced because of changing technology, 4) discrimination, and 5) employers laying off workers because the cost exceeds the return. The affect of structural unemployment in an economy is sometimes hard to measure. If a worker loses a high paying job, say at $15 per hour, and gets rehired at say $7 an hour, statistically this worker shows up as employed. But such a statistic is misleading. That worker will have to adjust his/her living standards accordingly. If this is happening to tens of thousands of workers simultaneously, then the country’s living standard is decreasing.

Cyclical Unemployment. Caused by a downward swing in the business cycle. It affects workers in many different industries simultaneously, and is usually accompanies a recession or depression. As income drops, spending drops, which eventually leads to workers being laid off. The government tries to avoid cyclical unemployment through the promotion of growth and efficiency.

Seasonal Unemployment. In our society, at any given time, there are thousands of people out of work because it is the “slow season”. There is a “tourist season” and a “harvest season”. When the season is over, the workers may collect unemployment benefits or remain out of the workforce until the new season begins.

Full Employment. Full employment refers to when an economy operates at an unemployment rate equal to the sum of frictional and structural unemployment rates, which most economists consider essentially unavoidable. The definition of full employment has changed over the years. It has increased. It used to be 3%. Now it ranges between 4 and 5 % depending on the economist or the current administration. It is another way of underestimating the impact of unemployment.

There are a number of problems with using the unemployment rate as a method to assessing our economy. First, the unemployment rate can sometimes overstate the number of people unemployed. Some people who claim to be unemployed and actively looking for work may not be actively looking. a person might claim to be actively looking for a job to remain eligible for government payments to the unemployed. In this case, a person who is actually not in the labor force is counted as unemployed. Other people might be engaged in illegal activity, such as drug dealing, or want to conceal a legitimate job to avoid paying taxes. The opposite can also be true. Sometimes there is understating of the number of people unemployed. For example, discouraged workers, those workers who would like to have a job but have given up looking, are not counted as unemployed because they are not included in the labor force. Where are these discouraged workers? They are in depressed rural areas and in our nation’s largest cities. If you visit these places during the day you will find many teenagers and adults standing around with nothing to do. From a statistical point of view, these people are not considered unemployed. It is as if they are not part of our economy. To be counted as unemployed by the Bureau of Labor, you have to be looking for work. A third problem is that the official unemployment rate includes part-time workers as fully employed. A fourth problem is dealing with underemployed. These are workers who are working at jobs that they are overqualified for. The traditional person with a Ph.D driving a taxi cab is an example. The economy does not benefit from the full range of their skills.

To sum up, the U3 measure of unemployment only measures unemployment among those who are actively seeking a job. Those who have become discouraged by the inability to find a job and have ceased looking are not counted as being among the unemployed, and the U3 measure makes no adjustment for those who are forced into part-time jobs because there is no full-time employment.

The government knows that the U3 “headline” unemployment rate is seriously understated and provides a broader measure known as U6. This measure, which is seldom reported by the financial media, includes short-term discouraged workers (those who have not looked for jobs for six months or less) and an adjustment for those who wish full time employment but can only find part time work.

Add long-term discouraged workers. No official unemployment rate includes long-term (more than six months) discouraged workers as unemployed.

John Williams from shadowstats.com estimates this number and adds it to the U6 measure to produce a current rate of US unemployment of 22.5 per cent (January 2012), an unemployment rate 2.5 times higher than the official rate. John Williams also believes there are problems with the Bureau of Labor Statistics seasonal adjustments and “birth-death” model where the BLS overestimates new jobs and underestimates lost jobs. Seasonal adjustments and the “birth-death” model were designed with a growing economy in mind and result in miscounts during downturns. For example, the “birth-death” model estimates new jobs that are created from new start-up companies that are not yet reporting, and it estimates the job losses from companies that have gone out of business. In a growing economy, start-ups exceed jobs losses, but the situation reverses during downturns or during periods of sub-normal job growth.

An Alternative Perspective on Unemployment

What has been explained above is the textbook definition and the traits and features of unemployment that can be found in most economic textbooks. But what does “unemployment” mean to individual workers? How does unemployment come to exist? Unemployment is an indicator of the enormous increase in the productivity of labor. More and more products are generated with fewer and fewer people. Millions are not needed because the workers who are still needed are so productive that everything the employers want to have produced at a profit has already been produced. In other words: people are unemployed, made “redundant,” because of abundance. The means to produce wealth have become so highly developed that society needs less and less workers. Productivity advances throw millions of people out of work and into destitution. By using workers more efficiently and more intensely, employers cut down on their costs – and that is what workers are for them, costs to be reduced and minimized. In our modern economy, productivity increases mean that more is produced for the companies with cheaper labor. When this happens, their wealth grows. On the other side, the poverty of those who are no longer needed grows.

So as more workers lose their jobs, a transformation occurs on how to view unemployed workers. What begins as a concern for the plight of the unemployed ends as a concern for profit and the health of the economy. What begins as a show of sympathy for the hardships of the unemployed turns into a criticism of the burden that the unemployed put on the state and its budget. What begins as the self-criticism of the government, that it has not done enough to provide workers with opportunities, ends as a criticism of the unemployed (keywords: “skills shortage” or “education gap”). The unemployed workers themselves are blamed for their lack of work. No discussion is allowed on how the economic system (capitalism) might be responsible for persistent unemployment.

Because of the manipulation of the official unemployment rate, many people are suggesting that the Civilian Labor Force Participation Rate is a more reliable statistic for measuring unemployment. According to the Household Survey Report of October 2014, 232,000 people found jobs. What is more disturbing is that the people not in the labor force, rose to a new record high, increasing by 315,000 to 92.6 million. The official unemployment rate for October 2014 fell to 5.9%. The official Civilian Labor Force Participation Rate also fell from 62.8% to 62.7%. How can that be? This is explained because more people have given up looking for work and no longer fall on the Bureau of Economic Statistics radar.